An aerial view of Johannesburg, a city of more than 4-million. Picture: THINKSTOCK
An aerial view of Johannesburg, a city of more than 4-million. Picture: THINKSTOCK

The finance minister started his maiden medium-term budget policy statement (MTBPS) with a quote from Charles Dickens’s, A Tale of Two Cities, selected, he said, to illustrate that the country is at a metaphorical crossroads, facing either an ascent to heaven or a descent to hell.

He stressed that as an observer and analyst of municipal finances, there was little to take away that spoke specifically to the local government or the inter-governmental fiscal framework, the arrangement that exists for the transfer of funds from national to provincial and local government.

The importance of cities is increasingly being recognised globally, and SA is no exception. The majority of the population now lives in urban areas, and urbanisation is increasing. Nearly half of the country’s population lives in the metros, the sub-set of large cities that are members of the South African Cities Network (SACN): Johannesburg, Cape Town, eThekwini, Tshwane, Ekurhuleni, Nelson Mandela Bay, Mangaung, Buffalo City and Msunduzi.

These cities are very important sites of economic activity: they account for two thirds of the national GDP.

Municipalities raise money for their operations by charging residents for electricity and water and waste removal, and rates charged on commercial and residential property. Research from the SACN in the biennial state of city finances report finds that city revenues are proving to be quite resilient in the face of worsening economic conditions. Cities are key sites of engagement of the key social challenges of poverty, inequality and unemployment identified in the national development plan (NDP).  Municipalities receive assistance in meeting their developmental local government in the form of fiscal transfers from national government.

The call for reprioritised spending directed to supporting economic development in townships and increased investment in municipal social infrastructure, is welcome.

These transfers consist of various grants of which the largest, the local government equitable share, is an unconditional grant intended primarily to enable cities to meet their obligation to provide free basic services (water, sanitation, electricity and solid waste removal) to people who are unable to afford them.

The other transfers are conditional grants of various kinds that fund specific responsibilities and programmes in municipalities, including infrastructure. SACN research shows that between 2013-2014 and 2016-2017 direct transfers to cities grew at an average annual rate of 12%, but this annual growth is expected to reduce over the 2017-2018 medium-term expenditure framework.

More efficient municipalities

The 2018 budget cut the allocation to local government by R3.2bn, and conditional grants to local government were reduced by R13.9bn to fund free basic education. The National Treasury stance has typically been that municipalities and provinces need to be more efficient in how they spend money to meet their mandates. To put this into context, though, the Treasury estimates that by 2018-2019, transfers to local government will be less than interest payments on the national debt.

The medium-term budget was relatively sparse on detail as far as the minister’s thinking on local government is concerned. We did not see any major tweaks from the February budget, which predicted a better fiscal situation than has come to pass. The economy is, indeed, at a crossroads of low growth and therefore low tax revenue. It is thus no surprise that the windfall of the medium-term budget in 2017, which increased grants to local government across the board, was not repeated.

The speech was structured around the president’s measures to stimulate the economy, all of which will have a beneficial effect on municipal finances. South African cities have grown at a greater rate than the economy in the past. The call for reprioritised spending directed to supporting economic development in townships and increased investment in municipal social infrastructure, is welcome.

The minister highlighted the infrastructure investment that continues to take place in municipalities through the neighbourhood development partnership grant. While the argument can be made that a new fiscal transfer from national government that directly stimulates economic growth in urban areas should be considered in the 2019 budget, as the minister said, “the MTBPS is not a budget. It is a statement.” In that respect, the medium-term budget was a strong and welcome statement of fiscal intent. And a caveat that, for now, purgatory will have to do.

• Mughogho is programmes manager: well governed cities at the South African Cities Network.

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